Basel Official Defends New Global Bank Capital Rules

A simple approach to reining in
risks at banks would fail to capture the complexity of modern
day lenders, a top global regulator said.

A simple approach to reining in
risks at banks would fail to capture the complexity of modern
day lenders, a top global regulator said.

Wayne Byres, secretary general of the Basel Committee, said
on Wednesday that relying on a single, simple indicator to
capture all risks was asking too much.

The committee is a global forum of central bank and banking
supervisors which wrote the Basel III rules on bank capital that
are being phased in from January and have being criticized by
British and U.S. supervisors for being too unwieldy to work.

Basel III is the world's regulatory response to the
financial crisis, forcing banks to triple the amount of basic
capital they hold in a bid to avoid future taxpayer bailouts.

"Pilots do not focus on a single dial in the cockpit when
they fly. Instead, a range of instruments, designed to give them
a broader context and perspective, provides much greater
information content," Byres told a conference in Portugal.

Thomas Hoenig, a director of the U.S. Federal Deposit
Insurance Corp, which regulates some banks, said in September
the United States should reject Basel III because it was too
complex and based on subjective judgment calls.

And Bank of England director of financial stability and
Basel Committee member, Andrew Haldane, said in August that
Basel needed a rethink as it may be too complex to work.

Paul Tucker, the BoE's deputy governor, said last week Basel
III relied too much on a "risk-based approach" whereby banks use
internal models to calculate how much capital they should hold.

This over-reliance on internal models was unsafe and he
called for simpler approaches such as a floor on the actual
amount of capital a bank must hold, irrespective of the figure
internal risk models come up with.

Britain's top banks supervisor, Andrew Bailey, said this week
he will require banks to have a conservative bias in their
internal models and he would change models that underestimated
capital requirements.

Byres said the Basel rules reinforced a risk-based approach
with safeguards such as far higher basic capital requirements,
new liquidity buffers and a leverage ratio or balance sheet cap.

"Even if calibrated to an appropriate level for the average
bank balance sheet, a simple capital-to-assets ratio will, on
its own, create incentives for banks to undertake riskier
activities and reduce their less risky activities," he said.

"We also have seen in the past that simple measures can be
easily arbitraged - the growth of off-balance sheet business,
particularly prior to the advent of the risk-based regime, was
one manifestation of this tendency," Byres said.

It was "highly unlikely" the 2007-09 financial crisis, which
saw banks having to be rescued by taxpayers, could have been
avoided altogether with a better set of bank capital rules,
Byres said.

"The point I would make is that a corner solution of either
extreme complexity or absolute simplicity will almost inevitably
be suboptimal - like most things in life, we need to find a
balance between the two."